How Fiscal Policy Affects the Price Level: Britain’s First Experience with Paper Money
Pamfili Antipa, Banque de France

Between 1797 and 1821, Britain suspended the gold standard in order to finance the Napoleonic Wars. This measure was accompanied by large scale debt accumulation and inflation: After Napoleon’s final defeat at Waterloo in 1815, the debt to GDP ratio climbed to 226%; the price level exceeded its 1797 level by 22.3%. Under these circumstances and given institutional settings that allowed excluding the possibility of strategic default, I will show that expectations of how debt would be stabilized in the future shaped the observed evolution of the price level. My contribution, thus, establishes the importance of fiscal factors for the determination of the price level.

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